SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 240 and 249

[Release No. 34-71958; File No. S7-05-14]

RIN 3235-AL45

Recordkeeping and Reporting Requirements for Security-Based Swap Dealers, Major Security-Based Swap Participants, and Broker-Dealers; Capital Rule for Certain Security-Based Swap Dealers

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

SUMMARY: In accordance with the Dodd-Frank Wall Street Reform and Consumer Protection

Act (Dodd-Frank Act), the Securities and Exchange Commission (Commission), pursuant to

the Securities Exchange Act of 1934 (Exchange Act), is proposing recordkeeping, reporting,

and notification requirements applicable to security-based swap dealers (SBSDs) and major

security-based swap participants (MSBSPs), securities count requirements applicable to certain

SBSDs, and additional recordkeeping requirements applicable to broker-dealers to account for

their security-based swap and swap activities. The Commission also is proposing an additional

capital charge provision that would be added to the proposed capital rule for certain SBSDs.

Finally, the Commission is proposing technical amendments to the broker-dealer recordkeeping,

reporting, and notification requirements.

DATES: Comments should be received on or before [insert date 60 days after publication in the

Federal Register].

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic comments:

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Use the Commissions Internet comment form

(http://www.sec.gov/rules/proposed.shtml); or

Send an e-mail to rule-comments@sec.gov. Please include File Number

S7-05-14 on the subject line; or

Use the Federal eRulemaking Portal (http://www.regulations.gov). Follow the

instructions for submitting comments.

Paper comments:

Send paper comments to Kevin M. ONeill, Deputy Secretary, Securities and

Exchange Commission, 100 F Street, NE, Washington, DC 20549-1090.

All submissions should refer to File Number S7-05-14. This file number should be included on

the subject line if e-mail is used. To help the Commission process and review your comments

more efficiently, please use only one method. The Commission will post all comments on the

Commissions Internet website (http://www.sec.gov/rules/proposed.shtml). Comments also are

available for website viewing and printing in the Commissions Public Reference Room, 100 F

Street, NE, Washington, DC 20549, on official business days between the hours of 10:00 am and

3:00 pm. All comments received will be posted without change; the Commission does not edit

personal identifying information from submissions. You should submit only information that

you wish to make publicly available.

FOR FURTHER INFORMATION CONTACT: Michael A. Macchiaroli, Associate Director,

at (202) 551-5525; Thomas K. McGowan, Associate Director, at (202) 551-5521; Randall W.

Roy, Assistant Director, at (202) 551-5522; Denise Landers, Senior Special Counsel, at (202)

551-5544; Raymond A. Lombardo, Branch Chief, at (202) 551-5755; Timothy C. Fox, Special

Counsel at (202) 551-5687; or Valentina Minak Deng, Special Counsel, at (202) 551-5778,

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http://www.sec.gov/rules/proposed.shtmlhttp:http://www.regulations.govmailto:rule-comments@sec.govhttp://www.sec.gov/rules/proposed.shtml

Division of Trading and Markets, Securities and Exchange Commission, 100 F Street, NE,

Washington, DC 20549-7010.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. BACKGROUND ................................................................................................................................................... 5 II. PROPOSED RULES AND RULE AMENDMENTS ......................................................................................18

A. Recordkeeping ................................................................................................................................................. 18 1. Introduction ................................................................................................................................................... 18 2. Records to be Made and Kept Current .......................................................................................................... 23

a. Amendments to Rule 17a-3 and Proposed Rule 18a-5 .............................................................................. 27 b. Additional Proposed Amendments to Rule 17a-3...................................................................................... 57

3. Record Maintenance and Preservation Requirements ................................................................................... 61 a. Amendments to Rule 17a-4 and Proposed Rule 18a-6 .............................................................................. 62 b. Additional Proposed Amendments to Rule 17a-4...................................................................................... 97

B. Reporting ......................................................................................................................................................... 99 1. Introduction ................................................................................................................................................... 99 2. Periodic Filing of Proposed Form SBS ....................................................................................................... 102

a. Amendments to Rule 17a-5 and Proposed Rule 18a-7 ............................................................................102 b. Information Elicited in Form SBS ........................................................................................................... 109

i. Part 1 of Proposed Form SBS .............................................................................................................. 112 ii. Part 2 of Proposed Form SBS .............................................................................................................. 130 iii. Part 3 of Proposed Form SBS .............................................................................................................. 135 iv. Part 4 of Proposed Form SBS .............................................................................................................. 138 v. Part 5 of Proposed Form SBS .............................................................................................................. 145

3. Filing of Annual Audited Financial Reports and Other Reports .................................................................149 a. Amendments to Rule 17a-5 and Proposed Rule 18a-7 ............................................................................150 b. Additional Proposed Amendments to Rule 17a-5.................................................................................... 182

C. Notification .................................................................................................................................................... 184 1. Introduction ................................................................................................................................................. 184 2. Amendments to Rule 17a-11 and Proposed Rule 18a-8 .............................................................................. 187 3. Additional Proposed Amendments to Rule 17a-11 ..................................................................................... 201

D. Quarterly Securities Count and Capital Charge for Unresolved Securities Differences ........................203 1. Introduction ................................................................................................................................................. 203 2. Proposed Rule 18a-9 ................................................................................................................................... 206 3. Capital Charge ............................................................................................................................................. 212

III. GENERAL REQUEST FOR COMMENT .................................................................................................... 212 IV. PAPERWORK REDUCTION ACT ............................................................................................................... 213

A. Summary of Collections of Information Under The Proposed Rules And Proposed Rule Amendments 214

1. Proposed Amendments to Rule 17a-3 and Proposed Rule 18a-5 ................................................................214 2. Proposed Amendments to Rule 17a-4 and Proposed Rule 18a-6 ................................................................216 3. Proposed Amendments to Rule 17a-5 and Proposed Rule 18a-7 ................................................................219 4. Proposed Amendments to Rule 17a-11 and Proposed Rule 18a-8 ..............................................................221 5. Proposed Rule 18a-9 ................................................................................................................................... 223

B. Proposed Use of Information ....................................................................................................................... 223 C. Respondents ................................................................................................................................................... 224 D. Total Initial And Annual Recordkeeping And Reporting Burden ...........................................................230

1. Proposed Amendments to Rule 17a-3 and Proposed Rule 18a-5 ................................................................230 2. Proposed Amendments to Rule 17a-4 and Proposed Rule 18a-6 ................................................................240 3. Proposed Amendments to Rule 17a-5 and Proposed Rule 18a-7 ................................................................253

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4. Proposed Amendments to Rule 17a-11 and Proposed Rule 18a-8 ..............................................................269 5. Proposed Rule 18a-9 ................................................................................................................................... 274

E. Collection of Information Is Mandatory ..................................................................................................... 275 G. Retention Period for Recordkeeping Requirements .................................................................................. 277 H. Request for Comment ................................................................................................................................... 277

V. ECONOMIC ANALYSIS ................................................................................................................................ 279 A. Introduction ................................................................................................................................................... 279 B. Baseline of Economic Analysis ..................................................................................................................... 282

1. OTC Derivatives Market ............................................................................................................................. 282 2. OTC Derivatives Market Participants and Broker-Dealers ......................................................................... 289

a. Stand-Alone SBSDs and Stand-Alone MSBSPs .....................................................................................290 b. Bank Security-Based Swap Dealers and Bank Major Security-Based Swap Participants .......................291 c. Entities Registered as Broker-Dealers ..................................................................................................... 293

i. Rules 17a-3 and 17a-4.......................................................................................................................... 294 ii. Rule 17a-5 ............................................................................................................................................ 295

a. Periodic Reports .......................................................................................................................... 295 b. Annual Audited Reports and Related Notifications ....................................................................296 c. Customer Statements .................................................................................................................. 296 d. Additional ANC Broker-Dealer Reports .....................................................................................297

iii. Rule 17a-11 .......................................................................................................................................... 297 a. Failure to Meet Minimum Capital Requirements ........................................................................297 b. Early Warning of Potential Capital or Model Problem ...............................................................298 c. Failure to Make and Keep Current Books and Records ..............................................................299 d. Material Weakness ...................................................................................................................... 299 e. Failure to Make a Required Reserve Deposit ..............................................................................300

C. Analysis of the Proposed Program and Alternatives ................................................................................. 300 1. Overview The Proposed Recordkeeping, Reporting, Notification, and Securities Count Program .........300 2. Alternatives to the Proposed Recordkeeping, Reporting, Notification, and Securities Count Rules ..........305 3. Requirements to Make and Keep Records .................................................................................................. 311

a. Rule 17a-3, as Proposed to be Amended ................................................................................................. 311 b. Proposed Rule 18a-5 ................................................................................................................................ 313 c. Request for Comment on Recordkeeping Provisions ..............................................................................314

4. Requirements to Preserve Records .............................................................................................................. 316 a. Rule 17a-4, as Proposed to be Amended ................................................................................................. 316 b. Proposed Rule 18a-6 ................................................................................................................................ 318

5. Reporting ..................................................................................................................................................... 320 a. Broker-Dealer SBSDs and Broker-Dealer MSBSPs................................................................................323 b. Stand-Alone SBSDs................................................................................................................................. 327 c. Stand-Alone MSBSPs .............................................................................................................................. 330 d. Bank SBSDs and Bank MSBSPs ............................................................................................................. 333

6. Notification Requirements .......................................................................................................................... 334 a. Broker-Dealer SBSDs and Broker-Dealer MSBSPs................................................................................335 b. Stand-Alone SBSDs, Stand-Alone MSBSPs, Bank SBSDs, and Bank MSBSPs ....................................336

7. Quarterly Securities Count .......................................................................................................................... 338 D. Impact on Efficiency, Competition, and Capital Formation .....................................................................340 E. Implementation Considerations ................................................................................................................... 343

VI. REGULATORY FLEXIBILITY ACT CERTIFICATION ..........................................................................348 VII.SMALL BUSINESS REGULATORY ENFORCEMENT FAIRNESS ACT ..............................................352 VIII. STATUTORY BASIS AND TEXT OF THE PROPOSED AMENDMENTS AND NEW RULES ...353

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I. BACKGROUND

On July 21, 2010, President Obama signed the Dodd-Frank Act into law.1 Title VII of

the Dodd-Frank Act (Title VII) established a new regulatory framework for the over-the-

counter (OTC) derivatives markets.2 In this regard, Title VII was enacted, among other

reasons, to reduce risk, increase transparency, and promote market integrity within the financial

system by, among other things: (1) providing for the registration and regulation of SBSDs and

MSBSPs; (2) imposing clearing and trade execution requirements on swaps and security-based

swaps, subject to certain exceptions; (3) creating recordkeeping and real-time reporting regimes;

1 See Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, Pub. L. 111203, 124 Stat. 1376 (2010).

2 Pursuant to section 701 of the Dodd-Frank Act, Title VII may be cited as the Wall Street Transparency and Accountability Act of 2010. See Pub. L. 111203, 701. The Dodd-Frank Act assigns responsibility for the oversight of the U.S. OTC derivatives markets to the Commission, the Commodity Futures Trading Commission (CFTC), and certain prudential regulators. The term prudential regulator is defined in section 1(a)(39) of the Commodity Exchange Act (CEA) (7 U.S.C. 1(a)(39)) and that definition is incorporated by reference in section 3(a)(74) of the Exchange Act (15 U.S.C. 78c(a)(74)). Pursuant to the definition, the Board of Governors of the Federal Reserve System (Federal Reserve), the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), the Farm Credit Administration, or the Federal Housing Finance Agency (collectively, the prudential regulators) is the prudential regulator of an SBSD, MSBSP, swap participant, or major swap participant if the entity is directly supervised by that agency. The Commission has oversight authority with respect to a security-based swap as defined in section 3(a)(68) of the Exchange Act (15 U.S.C. 78c(a)(68)), including to implement a registration and oversight program for a security-based swap dealer as defined in section 3(a)(71) of the Exchange Act (15 U.S.C. 78c(a)(71)) and a major security-based swap participant as defined in section 3(a)(67) of the Exchange Act (15 U.S.C. 78c(a)(67)). The CFTC has oversight authority with respect to a swap as defined in section 1(a)(47) of the CEA (7 U.S.C. 1(a)(47)), including to implement a registration and oversight program for a swap dealer as defined in section 1(a)(49) of the CEA (7 U.S.C. 1(a)(49)) and a major swap participant as defined in section 1(a)(33) of the CEA (7 U.S.C. 1(a)(33)). The Commission and the CFTC jointly have adopted rules to further define, among other things, the terms swap, swap dealer, major swap participant, security-based swap, security-based swap dealer, and major security-based swap participant. See Further Definition of Swap, Security-Based Swap, and Security-Based Swap Agreement; Mixed Swaps; Security-Based Swap Agreement Recordkeeping, Exchange Act Release No. 67453 (July 18, 2012), 77 FR 48208 (Aug. 13, 2012) (joint Commission/CFTC final rule); Further Definition of Swap Dealer, Security-Based Swap Dealer, Major Swap Participant, Major Security-Based Swap Participant and Eligible Contract Participant, Exchange Act Release No. 66868 (Apr. 27, 2012), 77 FR 30596 (May 23, 2012) (joint Commission/CFTC final rule).

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and (4) enhancing the Commissions rulemaking and enforcement authorities with respect to all

registered entities and intermediaries subject to the Commissions oversight.3

Section 764 of the Dodd-Frank Act added section 15F to the Exchange Act.4 Section

15F(f)(2) provides that the Commission shall adopt rules governing reporting and recordkeeping

for SBSDs and MSBSPs.5 Section 15F(f)(1)(A) provides that SBSDs and MSBSPs shall make

such reports as are required by the Commission, by rule or regulation, regarding the transactions

and positions and financial condition of the SBSD or MSBSP.6 Section 15F(f)(1)(B)(ii) provides

that SBSDs and MSBSPs without a prudential regulator (respectively, nonbank SBSDs and

nonbank MSBSPs) shall keep books and records in such form and manner and for such period

as may be prescribed by the Commission by rule or regulation.7 Section 15F(f)(1)(B)(i) provides

that SBSDs and MSBSPs for which there is a prudential regulator (respectively, bank SBSDs

and bank MSBSPs) shall keep books and records of all activities related to their business as an

SBSD or MSBSP in such form and manner and for such period as may be prescribed by the

Commission by rule or regulation.8 Section 15F(g) of the Exchange Act requires SBSDs and

MSBSPs to maintain daily trading records with respect to security-based swaps and provides that

the Commission shall adopt rules governing daily trading records for SBSDs and MSBSPs.9

3 See Pub. L. 111203, 701 through 774. 4 See Pub. L. 111203, 764; 15 U.S.C. 78o-10. 5 See 15 U.S.C. 78o-10(f)(2). 6 See 15 U.S.C. 78o-10(f)(1). 7 See 15 U.S.C. 78o-10(f)(1)(B)(ii). A nonbank SBSD or nonbank MSBSP could be dually registered with

the Commission as a broker-dealer (respectively, a broker-dealer SBSD or broker-dealer MSBSP) or registered with the Commission only as an SBSD or MSBSP (respectively, a stand-alone SBSD or stand-alone MSBSP). Any of these registrants or a bank SBSD or bank MSBSP also could register with the CFTC as a futures commission merchant (FCM), swap dealer, or major swap participant.

8 See 15 U.S.C. 78o-10(f)(1)(B)(i). 9 See 15 U.S.C. 78o-10(g).

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Finally, section 15F(i)(2) of the Exchange Act provides that the Commission shall adopt rules

governing documentation standards for SBSDs and MSBSPs.10

The Commission anticipates that a number of broker-dealers will register as SBSDs

(broker-dealer SBSDs) or potentially as MSBSPs (broker-dealer MSBSPs).11 Further, the

Commission expects that some broker-dealers that are not registered as an SBSD or an MSBSP

nonetheless will engage in security-based swap and swap activities.12 The Commission has

authority under section 17(a)(1) of the Exchange Act to adopt rules requiring broker-dealers

which would include broker-dealer SBSDs and broker-dealer MSBSPs to make and keep for

prescribed periods such records, furnish such copies thereof, and make and disseminate such

reports as the Commission, by rule, prescribes as necessary or appropriate in the public interest,

10 See 15 U.S.C. 78o-10(i). 11 While it is anticipated that some broker-dealers and banks will register as SBSDs in order to engage in

security-based swap activities, it is unclear whether broker-dealers or banks will register as MSBSPs. For example, a broker-dealer or bank may be required to register as an MSBSP because of the nature of its security-based swap activities. See 15 U.S.C. 78a(c)(67) (defining the term major security-based swap participant); Further Definition of Swap Dealer, Security-Based Swap Dealer, Major Swap Participant, Major Security-Based Swap Participant and Eligible Contract Participant, 77 FR 30596 (further defining the term major security-based swap participant). In this case, the broker-dealer or bank may conclude that it is more efficient to register as an SBSD in order to engage in security-based swap activities permitted of an SBSD but not of an MSBSP. Nonetheless, because a broker-dealer or bank could register as an MSBSP, the proposed rules and the discussion in this release contemplate these categories of registrants. A broker-dealer MSBSP would be subject to all the securities laws applicable to a broker-dealer, including capital, margin, segregation, recordkeeping, reporting, notification, and securities count requirements, and to any additional requirements that would be applicable only to MSBSPs. Similarly, a bank MSBSP would be subject to all laws and regulations applicable to a bank and to any additional requirements that would be applicable only to MSBSPs.

12 The term security-based swap dealer is defined in section 3(a)(71) of the Exchange Act. See 15 U.S.C. 78c(a)(71). The definition excludes an entity that enters into security-based swaps agreements for its own account, either individually or in a fiduciary capacity, but not as a part of a regular business. See 15 U.S.C. 78c(a)(71)(C). Further, section 3(a)(71)(D) provides that the Commission shall exempt from designation as an SBSD an entity that engages in a de minimis quantity of security-based swap dealing in connection with transactions with or on behalf of its customers and that the Commission shall promulgate regulations to establish factors with respect to the making of any determination to exempt. See 15 U.S.C. 78c(a)(71)(D). The Commission has adopted Rule 3a71-2 to establish a de minimis exception under section 3(a)(71)(D) of the Exchange Act. See 17 CFR 240.3a71-2; Further Definition of Swap Dealer, Security-Based Swap Dealer, Major Swap Participant, Major Security-Based Swap Participant and Eligible Contract Participant, 77 FR at 3063530643.

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http:activities.12http:MSBSPs).11http:MSBSPs.10

for the protection of investors, or otherwise in furtherance of the purposes of the Exchange Act.13

The Commission also is proposing largely technical amendments to the broker-dealer

recordkeeping, reporting, and notification rules.14

Pursuant to sections 15F and 17(a) of the Exchange Act, the Commission is proposing to

amend Rules 17a-3, 17a-4, 17a-5, and 17a-11 to establish a recordkeeping, reporting, and

notification program for broker-dealer SBSDs and broker-dealer MSBSPs. The amendments to

13 See 15 U.S.C. 78q(a)(1). Section 771 of the Dodd-Frank Act states that unless otherwise provided by its terms, Subtitle B of Title VII (relating to the regulation of the security-based swap markets) does not divest any appropriate Federal banking agency, the Commission, the CFTC, or any other Federal or State agency, of any authority derived from any other provision of applicable law. See Pub. L. 111203, 771.

14 See 17 CFR 240.17a-3 (Rule 17a-3); 17 CFR 240.17a-4 (Rule 17a-4); 17 CFR 240.17a-5 (Rule 17a-5); 17 CFR 240.17a-11 (Rule 17a-11). The Dodd-Frank Act amended the definition of security in section 3(a)(10) of the Exchange Act to include a security-based swap. See Pub. L. 111203, 761(a)(2); 15 U.S.C. 78c(a)(10). Therefore, the term security as used in Rules 17a-3, 17a-4, 17a-5, and 17a-11 includes a security-based swap, and any requirement in those rules relating to a security applies to a security-based swap. The Commission, however, has issued temporary exemptive relief to address the effect that the amendment to the definition of security would have on requirements in Exchange Act provisions and rules that did not otherwise apply specifically to security-based swaps prior to the amendment. See Order Granting Temporary Exemptions under the Securities Exchange Act of 1934 in Connection with the Pending Revision of the Definition of Security to Encompass Security-Based Swaps, and Request for Comment, Exchange Act Release No. 64795 (July 1, 2011), 76 FR 39927 (July 7, 2011) ([R]egistered broker-dealers will solely be exempt from those provisions and rules to the extent that those provisions or rules do not apply to the brokers or dealers security-based swap positions or activities as of July 15, 2011 the day before the effectiveness of the change to the security definition. In other words, during the exemptive period the application of current law will remain unchanged, and those particular Exchange Act requirements will continue to apply to registered broker-dealers security-based swap activities and positions to the same extent they apply currently. This approach is intended to help avoid undue market disruptions resulting from the change to the security definition, while at the same time preserving the current application of those particular provisions or rules to security-based swap activity by registered broker-dealers. Thus, under this approach of preserving the status quo, no exemption will be provided in connection with the [requirements in Exchange Act sections 17(a) and 17(b) and Rules 17a-3, 17a-4, 17a-5, 17a-8, and 17a-13] under the Exchange Act to the extent that those requirements currently apply to registered broker-dealer activities or positions involving instruments that will be security-based swaps (but registered broker-dealers will be exempted in connection with those requirements to the extent that the requirements do not already apply to activities or positions involving those instruments.); Order Extending Temporary Exemptions under the Securities Exchange Act of 1934 in Connection with the Revision of the Definition of Security to Encompass Security-Based Swaps, and Request for Comment, Exchange Act Release No. 68864 (Feb. 7, 2013), 78 FR 10218 (Feb. 13, 2013) (extending exemptive relief through February 11, 2014); Order Extending Temporary Exemptions under the Securities Exchange Act of 1934 in Connection with the Revision of the Definition of Security to Encompass Security-Based Swaps, and Request for Comment, Exchange Release No. 71485 (Feb. 5, 2014) (extending exemptive relief with respect to Rules 17a-3, 17a-4, 17a-5, 17a-11, and 17a-13 until the earliest compliance date set forth in any final rules regarding recordkeeping and reporting requirements for SBSDs and MSBSPs). The Commission expects that the adoption of the amendments contemplated herein would eliminate the need for temporary exemptive relief from section 17(a) and section 17(b) of the Exchange Act and Rules 17a-3, 17a-4, 17a-5, 17a-11, and 17a-13 thereunder.

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http:rules.14

Rules 17a-3 and 17a-4 would establish additional recordkeeping requirements applicable to

broker-dealers that are not dually registered as an SBSD or MSBSP to the extent they engage in

security-based swap or swap activities.

Pursuant to section 15F of the Exchange Act, the Commission is proposing new Rules

18a-5 through 18a-9.15 These new rules would establish a recordkeeping, reporting, and

notification program for stand-alone SBSDs, stand-alone MSBSPs, bank SBSDs, and bank

MSBSPs, and securities count requirements for stand-alone SBSDs.16 In addition, pursuant to

sections 15F and 17(a) of the Exchange Act, the Commission is proposing new FOCUS Report

Form SBS (Form SBS) that would be used by all types of SBSDs and MSBSPs to report

financial and operational information and, in the case of broker-dealer SBSDs and broker-dealer

MSBSPs, replace their use of Part II, Part IIA, Part IIB, or Part II CSE of the Financial and

Operational Combined Uniform Single Report (FOCUS Report).17

The proposed new rules are modeled on broker-dealer Rules 17a-3, 17a-4, 17a-5, 17a-11,

and 17a-13, and on the FOCUS Report. Specifically: (1) proposed Rules 18a-5 and 18a-6 (the

15 The Commission has proposed new Rules 18a-1 through 18a-4 to establish capital and margin requirements for SBSDs and MSBSPs, segregation requirements for SBSDs, and notification requirements with respect to segregation for SBSDs and MSBSPs. See Capital, Margin, and Segregation Requirements for Security-Based Swap Dealers and Major Security-Based Swap Participants and Capital Requirements for Broker-Dealers, Exchange Act Release No. 68071 (Oct. 18, 2012), 77 FR 70213 (Nov. 23, 2012).

16 The Commission is not proposing securities count requirements for stand-alone MSBSPs or bank SBSDs. Broker-dealer SBSDs and broker-dealer MSBSPs would be subject to the existing securities count rule applicable to broker-dealers Rule 17a-13. 17 CFR 240.17a-13. The Commission is not proposing amendments to Rule 17a-13. While in this release Rule 17a-11 is referred to as a notification rule and Rule 17a-13 is referred to as a securities count rule, Rule 17a-11 can be viewed as a reporting rule and Rule 17a-13 can be viewed as a recordkeeping rule. See Prompt Notice of Net Capital or Recordkeeping Violations, Exchange Act Release No. 9268 (July 29, 1971), 36 FR 14725 (Aug. 11, 1971) (adopting Rule 17a-11, in part, under section 17(a) of Exchange Act, which, as discussed above, requires a broker-dealer to make and keep for prescribed periods such records, furnish such copies thereof, and make and disseminate such reports as the Commission, by rule, prescribes as necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the Exchange Act); Quarterly Securities Counts by Certain Exchange Members, Brokers and Dealers, Exchange Act Release No. 9376 (Oct. 29, 1971), 36 FR 21178 (Nov. 4, 1971) (similarly adopting Rule 17a-13, in part, under section 17(a) of Exchange Act).

17 A broker-dealer must file the FOCUS Report Part II, Part IIA, Part IIB, or Part II CSE depending on the type of broker-dealer. A more detailed discussion of the FOCUS Report appears below in section II.B.2. of this release.

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http:Report).17http:SBSDs.16http:18a-9.15

new recordkeeping rules) are modeled on Rules 17a-3 and 17a-4, respectively (the broker-dealer

recordkeeping rules);18 (2) proposed Rule 18a-7 and proposed Form SBS (the new reporting

rules) are modeled on Rule 17a-5 and on the FOCUS Report, respectively (the broker-dealer

reporting rules);19 (3) proposed Rule 18a-8 (the new notification rule) is modeled on Rule 17a-11

(the broker-dealer notification rule);20 and (4) proposed Rule 18a-9 (the new securities count

rule) is modeled on the Rule 17a-13 (the broker-dealer securities count rule).21

The broker-dealer recordkeeping, reporting, notification, and security count requirements

served as the model for the proposals because SBSDs and MSBSPs are expected to operate in

financial markets and effect financial transactions that are similar to the financial markets in

which broker-dealers operate and the financial transactions that broker-dealers effect.22 In

addition, as discussed below, the objectives of these broker-dealer requirements are similar to the

objectives underlying the proposals regarding security-based swaps. Moreover, the broker-

dealer requirements have existed for many years and have established a system of recordkeeping

for securities transactions that reflect and support prudent business practices and accountability

of broker-dealers and have facilitated the ability of securities regulators to review and monitor

compliance with securities laws.23 Consequently, the Commission preliminarily believes the

18 Compare proposed Rule 18a-5, with 17 CFR 240.17a-3; compare proposed Rule 18a-6, with 17 CFR 240.17a-4.

19 Compare proposed Rule 18a-7, with 17 CFR 240.17a-5; compare proposed Form SBS, with the FOCUS Report.

20 Compare proposed Rule 18a-8, with 17 CFR 240.17a-11. 21 Compare proposed Rule 18a-9, with 17 CFR 240.17a-13. 22 See Capital, Margin, and Segregation Requirements for Security-Based Swap Dealers and Major Security-

Based Swap Participants and Capital Requirements for Broker-Dealers, 77 FR at 70216 (stating a similar rationale for basing the proposed capital, margin, and segregation requirements for SBSDs on the broker-dealer capital, margin, and segregation requirements).

23 See, e.g., Commission Guidance to Broker-Dealers on the Use of Electronic Storage Media Under the Electronic Signatures in Global and National Commerce Act of 2000 With Respect to Rule 17a-4(f), Exchange Act Release No. 44238 (May 1, 2001), 66 FR 22916 (May 7, 2001).

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http:effect.22http:rule).21

broker-dealer requirements provide an appropriate template on which to model a recordkeeping,

reporting, and notification program for SBSDs and MSBSPs and a securities count program for

SBSDs. Furthermore, as discussed above, it is expected that some nonbank SBSDs will dually

register as broker-dealers in order to be able to offer customers a broader range of securities-

based services than would be permitted of a nonbank SBSD.24 Therefore, establishing consistent

requirements could avoid potential competitive disparities between stand-alone SBSDs and

broker-dealer SBSDs with respect to their security-based swap business.

Additionally, in accordance with Title VII, the Commission recently proposed, among

other things, capital and margin requirements applicable to nonbank SBSDs and nonbank

MSBSPs, and segregation requirements applicable to SBSDs.25 The capital, margin, and

segregation proposals that would be applicable to SBSDs were modeled on the capital, margin,

and segregation requirements that are applicable to broker-dealers.26 The broker-dealer capital,

margin, segregation, recordkeeping, reporting, notification, and securities count requirements are

known collectively as the broker-dealer financial responsibility rules.27 The financial

responsibility rules collectively establish a comprehensive regulatory program designed to

promote the prudent operation of broker-dealers and the safeguarding of customer securities and

funds held by broker-dealers. The recordkeeping, reporting, notification, and securities count

requirements applicable to broker-dealers are an integral part of the financial responsibility rules

as they are designed to provide transparency into the business activities of broker-dealers and to

24 Although a broker-dealer SBSD would be able to offer customers a broader range of securities-based services than a bank SBSD, bank SBSDs are not expected to register as broker-dealers because of the regulatory burden associated with complying with the requirements applicable to all three types of entities.

25 See Capital, Margin, and Segregation Requirements for Security-Based Swap Dealers and Major Security-Based Swap Participants and Capital Requirements for Broker-Dealers, 77 FR 70213.

26 Id. See also 17 CFR 240.15c3-1 (the broker-dealer capital rule); FINRA Rules 4210 through 4240 (certain broker-dealer margin rules); 17 CFR 240.15c3-3 (the broker-dealer segregation rule).

27 See 17 CFR 240.3a40-1.

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assist the Commission and other securities regulators in reviewing and monitoring compliance

with the capital, margin, and segregation requirements. Similarly, the proposed recordkeeping,

reporting, notification, and securities count requirements applicable to SBSDs and MSBSPs

along with the proposed capital, margin, and segregation requirements for these registrants are

designed to establish a comprehensive financial responsibility program for SBSDs and MSBSPs.

Like the broker-dealer rules, the proposed recordkeeping, reporting, notification, and securities

count requirements applicable to SBSDs and MSBSPs are designed to provide transparency into

the business activities of SBSDs and MSBSPs and assist the Commission in reviewing and

monitoring compliance with the proposed capital, margin, and segregation requirements

applicable to SBSDs and MSBSPs.

While the proposed recordkeeping, reporting, notification, and securities count rules are

modeled on the broker-dealer rules, stand-alone SBSDs and stand-alone MSBSPs will not

engage in the same range of activities permitted of broker-dealers. For example, broker-dealers

are permitted to act as dealers with respect to all types of securities, whereas stand-alone SBSDs

would be permitted to act as dealers only with respect to security-based swaps and stand-alone

MSBSPs would not be permitted to act as dealers with respect to any types of securities.

Consequently, the proposed requirements in the new rules applicable to stand-alone SBSDs and

stand-alone MSBSPs reflect these differences and are narrower in scope than those applicable to

broker-dealer SBSDs and broker-dealer MSBSPs. Further, the proposed requirements applicable

to bank SBSDs and bank MSBSPs are narrower in scope than those applicable to stand-alone

SBSDs and stand-alone MSBSPs for three reasons. First, as noted above, the recordkeeping and

reporting requirements for bank SBSDs and bank MSBSPs unlike those for nonbank SBSDs

12

and nonbank MSBSPs must be related to their business as an SBSD or MSBSP.28 Second, as

banks, these registrants are subject to existing recordkeeping and reporting requirements

administered by the prudential regulators and therefore to avoid potentially duplicative or

conflicting requirements, the Commission has proposed fewer requirements for these entities.

Third, the prudential regulators rather than the Commission will administer the capital,

margin, and other prudential requirements applicable to bank SBSDs and bank MSBSPs and, as

noted above, one of the purposes of the proposed recordkeeping requirements is to assist the

Commission in reviewing and monitoring compliance with the proposed capital and margin rules

applicable to nonbank SBSDs and nonbank MSBSPs, which the Commission will administer.29

The Commission recognizes that there may be alternative recordkeeping, reporting,

notification, and securities count programs that could be used as a model to design a

recordkeeping, reporting, notification, and securities count program for SBSDs and MSBSPs.

Accordingly, in response to the requests for comment in this release, interested parties are

encouraged to consider whether alternative approaches would be appropriate for SBSDs and

MSBSPs generally as well as for each type of potential registrant broker-dealer SBSD, broker-

28 Compare 15 U.S.C. 78o-10(f)(1)(B)(i), with 15 U.S.C. 78o-10(f)(1)(B)(ii) and 15 U.S.C. 78q(a). As noted above, section 15F(f)(1)(B)(i) of the Exchange Act provides that each bank SBSD and bank MSBSP shall keep books and records of all activities related to the business as an SBSD or MSBSP in such form and manner and for such period as may be prescribed by the Commission by rule or regulation (emphasis added). See 15 U.S.C. 78o-10(f)(1)(B)(i). Whereas, section 15F(f)(1)(B)(ii) of the Exchange Act provides that each nonbank SBSD and nonbank MSBSP shall keep books and records in such form and manner and for such period as may be prescribed by the Commission by rule or regulation. See 15 U.S.C. 78o-10(f)(1)(B)(ii). Further, section 17(a) of the Exchange Act provides that broker-dealers shall make and keep for prescribed periods such records, furnish such copies thereof, and make and disseminate such reports as the Commission, by rule, prescribes as necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Exchange Act. See 15 U.S.C. 78q(a).

29 Section 15F(e)(1)(A) of the Exchange Act provides that the prudential regulators shall prescribe capital and margin requirements for bank SBSDs and bank MSBSPs, and section 4s(e)(1)(A) of the CEA provides that the prudential regulators shall prescribe capital and margin requirements for swap dealers and major swap participants for which there is a prudential regulator (bank swap dealers and bank swap participants). See 15 U.S.C. 78o-10(e)(1)(A); 7 U.S.C. 6s(e)(1)(A). The prudential regulators have proposed capital and margin requirements for bank swap dealers, bank SBSDs, bank swap participants, and bank MSBSPs. See Margin and Capital Requirements for Covered Swap Entities, 76 FR 27564 (May 11, 2011).

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dealer MSBSP, stand-alone SBSD, stand-alone MSBSP, bank SBSD, and bank MSBSP taking

into account the unique characteristics and activities of each type of potential registrant.

Some of the current rules that are proposed to be amended and the proposed new rules

prescribe recordkeeping or reporting requirements based on requirements in other rules that have

been proposed but not yet adopted. For example, Rules 17a-3 and 17a-4, as proposed to be

amended, and proposed Rules 18a-5 and 18a-6 would directly or indirectly cross-reference

requirements in proposed Rule 901 of Regulation SBSR and proposed Rules 15Fh-1 through

15Fh-6 and proposed Rule 15Fk-1.30 Similarly, Rules 17a-3, 17a-4, 17a-5, and 17a-11, as

proposed to be amended, and proposed Rules 18a-5, 18a-6, 18a-7, and 18a-8 cross-reference

requirements in the proposed capital, margin, and segregation requirements for SBSDs and

MSBSPs.31 If a cross-referenced rule is modified from the proposal when adopted, the

Commission intends to make any necessary corresponding modifications to the rules proposed in

this release when they are adopted.

Finally, the Commission also is proposing to add a capital charge provision to proposed

Rule 18a-1.32 Proposed Rule 18a-1 would establish net capital requirements for stand-alone

SBSDs and is modeled on Rule 15c3-1 under the Exchange Act (the broker-dealer net capital

rule) (Rule 15c3-1).33 The capital charge provision that would be added to proposed Rule 18a-

1, which is modeled on a provision in Rule 15c3-1, was inadvertently omitted from proposed

Rule 18a-1 when originally proposed. The Commission preliminarily believes that proposed

Rule 18a-1 should include a provision that parallels the capital charge in Rule 15c3-1.

30 See section II.A. of this release. 31 See Capital, Margin, and Segregation Requirements for Security-Based Swap Dealers and Major Security-

Based Swap Participants and Capital Requirements for Broker-Dealers, 77 FR 70213. 32 This proposal is discussed below in greater detail in section II.D.3. of this release. 33 See Capital, Margin, and Segregation Requirements for Security-Based Swap Dealers and Major Security-

Based Swap Participants and Capital Requirements for Broker-Dealers, 77 FR 7021770257.

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http:15c3-1).33http:18a-1.32http:MSBSPs.31http:15Fk-1.30

The Commission staff consulted with staff from the prudential regulators and the CFTC

in drafting the proposals discussed in this release.34 In addition, the proposals of the CFTC were

considered in developing the Commissions proposed recordkeeping, reporting, notification and

securities count rules for SBSDs and MSBSPs.

Request for Comment

The Commission requests comment on the general approach that would require SBSDs

and MSBSPs to comply with recordkeeping, reporting, notification, and securities count rules

modeled on the broker-dealer recordkeeping, reporting, notification, and securities count rules.

In addition, the Commission requests comment, including empirical data in support of

comments, in response to the following questions:

1. Will the entities that register as nonbank SBSDs engage in a securities business with

respect to security-based swaps that is similar to the securities business conducted by

broker-dealers? If not, describe how the securities activities of nonbank SBSDs will

differ from the securities activities of broker-dealers.

2. Will the entities that register as bank SBSDs engage in a securities business with respect

to security-based swaps that is similar to the securities business conducted by broker-

dealers? If not, describe how the securities activities of bank SBSDs will differ from the

securities activities of broker-dealers.

3. How many broker-dealers will register as SBSDs? Describe the types of broker-dealers

that will register as SBSDs and the types of activities these broker-dealers currently

engage in? How many banks will register as SBSDs? Describe the types of banks that

See Pub. L. 111203, 712(a)(2). The CFTC has adopted recordkeeping and reporting rules for swap dealers and major swap participants. See Swap Dealer and Major Swap Participant Recordkeeping, Reporting, and Duties Rules; Futures Commission Merchant and Introducing Broker Conflicts of Interest Rules; and Chief Compliance Officer Rules for Swap Dealers, Major Swap Participants, and Futures Commission Merchants, 77 FR 20128 (Apr. 3, 2012).

15

34

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will register as SBSDs and the types of activities these banks currently engage in?

4. How many entities will register as MSBSPs? What types of entities? How many broker-

dealers will register as MSBSPs? How many banks will register as MSBSPs?

5. Are there requirements in these proposed rules applicable to broker-dealer SBSDs and

broker-dealer MSBSPs but currently not applicable to stand-alone SBSDs or stand-alone

MSBSPs that should be applicable to standalone SBSDs or stand-alone MSBSPs, or vice

versa?

6. Are there requirements in these proposed rules applicable to broker-dealer SBSDs and

broker-dealer MSBSPs but currently not applicable to bank SBSDs or bank MSBSPs that

should be applicable to bank SBSDs or bank MSBSPs, or vice versa?

7. Are there provisions in the rules that the CFTC adopted governing recordkeeping and

reporting obligations of swap dealers and major swap participants that the Commission

should consider incorporating into the recordkeeping and reporting requirements for

SBSDs and MSBSPs? If so, please identify the specific provision and explain why the

Commission should incorporate it.

8. In the release adopting a further definition of major security-based swap participant, the

Commission stated that an entitys security-based swap positions in general would be

attributed to a parent, other affiliate, or guarantor for purposes of the MSBSP analysis to

the extent that the counterparties to those positions would have recourse to that other

entity in connection with the position.35 The Commission further stated that an entity that

becomes an MSBSP by virtue of security-based swaps directly entered into by others

must be responsible for compliance with all applicable requirements with respect to those

See Further Definition of Swap Dealer, Security-Based Swap Dealer, Major Swap Participant, Major Security-Based Swap Participant and Eligible Contract Participant, 77 FR at 30689.

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35

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security-based swaps (and must be liable for failures to comply), but may delegate

operational compliance with transaction-focused requirements to entities that directly are

party to the transactions.36 The Commission stated its preliminary belief that the same

approach should apply in the cross-border context when the guarantor and the guaranteed

persons are located in different jurisdictions.37 The Commission preliminarily believes

that certain of the recordkeeping requirements that would be applicable to MSBSPs under

the proposed amendments are transaction-focused and, therefore, that an MSBSP may

delegate operational compliance with them to the entities that are directly a party to the

transaction.38 For example, the Commission preliminarily believes that the proposed

requirements discussed below in section II.A.2. of this release under which MSBSPs

would need to make and keep current memoranda of proprietary orders, confirmations,

accountholder information, and records relating to certain business conduct standards are

transaction-focused. Similarly, the proposed requirements to retain communications

relating to the MSBSPs business as such are transaction-focused. On the other hand,

the Commission preliminarily believes that other recordkeeping requirements proposed

for MSBSPs are entity-level requirements and, therefore an MSBSP would not be

permitted to delegate operational compliance with respect to these requirements to other

entities. For example, the Commission preliminarily believes that the proposed

requirement that an MSBSP make and keep current a general ledger (or other records)

36 Id. 37 See Cross-Border Security-Based Swap Activities; Re-Proposal of Regulation SBSR and Certain Rules and

Forms Relating to the Registration of Security-Based Swap Dealers and Major Security-Based Swap Participants, Exchange Act Release No. 69490 (May 1, 2013), 78 FR 30968, 31034 (May 23, 2013).

38 The Commission preliminarily believes that the proposed reporting and notification requirements that would be applicable to MSBSPs are not transaction-focused and, therefore, the MSBSP could not delegate operation compliance with respect to these requirements to other entities.

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reflecting all assets and liabilities, income and expense, and capital accounts is an entity-

level requirement. Commenters are asked to identify which of the recordkeeping

requirements applicable to MSBSPs in proposed new Rules 18a-5 and 18a-6 that they

believe are transaction-focused and to explain their reasons for identifying them as such.

Commenters also are asked to identify any operational compliance challenges with

respect to the proposed recordkeeping requirements raised by attributing guaranteed

security-based swap positions to an MSBSP.

II. PROPOSED RULES AND RULE AMENDMENTS

A. Recordkeeping

1. Introduction

As discussed above in section I. of this release, section 15F(f)(2) of the Exchange Act

provides that the Commission shall adopt rules governing recordkeeping for SBSDs and

MSBSPs.39 The Commission also has concurrent authority under section 17(a)(1) of the

Exchange Act to prescribe recordkeeping requirements for broker-dealers.40 Further, section

15F(f)(1)(B)(i) of the Exchange Act provides that each bank SBSD and bank MSBSP shall keep

books and records of all activities related to its business as an SBSD or MSBSP in such form and

manner and for such period as may be prescribed by the Commission by rule or regulation.41

Section 15F(f)(1)(B)(ii) provides that each nonbank SBSD and nonbank MSBSP shall keep

books and records in such form and manner and for such period as may be prescribed by the

Commission by rule or regulation.42

39 See 15 U.S.C. 78o-10(f)(2). 40 See 15 U.S.C. 78q(a)(1). 41 See 15 U.S.C. 78o-10(f)(1)(B)(i). 42 See 15 U.S.C. 78o-10(f)(1)(B)(ii).

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http:regulation.42http:regulation.41http:broker-dealers.40http:MSBSPs.39

Section 15F(g) of the Exchange Act prescribes statutory recordkeeping requirements

applicable to SBSDs and MSBSPs and requires the Commission to adopt rules with respect to

these statutory requirements.43 In particular, section 15F(g)(1) provides that each registered

SBSD and MSBSP shall maintain daily trading records of the security-based swaps of the

registered SBSD and MSBSP and all related records (including related cash or forward

transactions) and recorded communications, including electronic mail, instant messages, and

recordings of telephone calls, for such period as may be required by the Commission by rule or

regulation.44 Section 15F(g)(2) provides that the daily trading records shall include such

information as the Commission shall require by rule or regulation.45 Section 15F(g)(3) provides

that each registered SBSD and MSBSP shall maintain daily trading records for each counterparty

in a manner and form that is identifiable with each security-based swap transaction.46 Section

15F(g)(4) provides that each registered SBSD and MSBSP shall maintain a complete audit trail

for conducting comprehensive and accurate trade reconstructions.47 Finally, section 15F(g)(5)

provides that the Commission shall adopt rules governing daily trading records for SBSDs and

MSBSPs.48

Section 15F(i)(1) of the Exchange Act provides that each registered SBSD and MSBSP

shall conform with such standards as may be prescribed by the Commission, by rule or

regulation, that relate to timely and accurate confirmation, processing, netting, documentation,

43 See 15 U.S.C. 78o-10(g). 44 See 15 U.S.C. 78o-10(g)(1). 45 See 15 U.S.C. 78o-10(g)(2). 46 See 15 U.S.C. 78o-10(g)(3). 47 See 15 U.S.C. 78o-10(g)(4). 48 See 15 U.S.C. 78o-10(g)(5).

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http:MSBSPs.48http:reconstructions.47http:transaction.46http:regulation.45http:regulation.44http:requirements.43

and valuation of all security-based swaps.49 Section 15F(i)(2) provides that the Commission

shall adopt rules governing documentation standards for SBSDs and MSBSPs.50

After considering the anticipated business activities of SBSDs and MSBSPs, the

Commission is proposing to establish a recordkeeping program for these registrants under

sections 15F and 17(a) of the Exchange Act that is modeled on the recordkeeping program for

broker-dealers codified in Rules 17a-3 and 17a-4.51 Rules 17a-3 and 17a-4 specify requirements

with respect to the records that a broker-dealer must make and keep current, as well as how long

and, the manner in which, these records and other records relating to a broker-dealer's business

must be maintained and preserved.52

In particular, Rule 17a-3 requires a broker-dealer to make and keep current certain books

and records.53 The required records include, among other records: blotters containing an

itemized daily record of all purchases and sales of securities; ledgers reflecting all assets and

liabilities, income and expense, and capital accounts; a securities record or ledger reflecting

separately for each security as of the clearance dates all long or short positions; a

memorandum of each brokerage order; a memorandum of each purchase or sale of a security for

the account of the broker-dealer; and copies of confirmations.54

49 See 15 U.S.C. 78o-10(i)(1). 50 See 15 U.S.C. 78o-10(i)(2). Pursuant to section 15F(i) of the Exchange Act, the Commission has proposed

Rule 15Fi-1 that would prescribe standards related to timely and accurate confirmation and documentation of security-based swaps. See Trade Acknowledgment and Verification of Security-Based Swap Transactions, Exchange Act Release No. 63727 (Jan. 14, 2011), 76 FR 3859 (Jan. 21, 2011).

51 See 17 CFR 240.17a-3; 17 CFR 240.17a-4. 52 See 17 CFR 240.17a-3; 17 CFR 240.17a-4. 53 See 17 CFR 240.17a-3. 54 Id. As noted above in section I. of this release, the Dodd-Frank Act amended the definition of security in

section 3(a)(10) of the Exchange Act to include a security-based swap. See Pub. L. 111203, 761(a)(2); 15 U.S.C. 78c(a)(10). Therefore, each reference in Rules 17a-3 and 17a-4 to a security includes a security-based swap. The Commission, however, has issued temporary exemptive relief excluding security-based swaps from the definition of security to the extent Commission rules did not otherwise apply specifically to security-based swaps prior to the amendment. See Order Granting Temporary Exemptions under the

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Rule 17a-4 requires a broker-dealer to preserve additional records if the broker-dealer

makes or receives the type of record.55 The categories of records include, among other records,

check books, bank statements, bills receivable or payable, communications relating to the

broker-dealers business as such, and written agreements.56 The rule also establishes retention

periods for all records required to be made and kept current under Rule 17a-3 and preserved

under Rule 17a-4, and prescribes, among other things, how the records must be retained,

including requirements for firms that preserve their records electronically.57

The recordkeeping program codified in Rules 17a-3 and 17a-4 is designed, among other

things, to promote the prudent operation of broker-dealers and assist the Commission, self-

regulatory organizations (SROs), and state securities regulators in conducting effective

examinations of broker-dealers.58 As the Commission has stated,

In combination, Rules 17a-3 and 17a-4 require broker-dealers to create, and preserve in an accessible manner, a comprehensive record of each securities transaction they effect and of their securities business in general. These rules impose minimum recordkeeping requirements that are based on standards a prudent broker-dealer should follow in the normal course of business. The requirements are an integral part of the investor protection function of the Commission, and other securities regulators, in that the preserved records are the primary means of monitoring compliance

Securities Exchange Act of 1934 in Connection with the Pending Revision of the Definition of Security to Encompass Security-Based Swaps, and Request for Comment, 76 FR 39927.

55 See 17 CFR 240.17a-4. 56 Id. 57 Id. 58 See, e.g., See Commission Guidance to Broker-Dealers on the Use of Electronic Storage Media under the

Electronic Signatures in Global and National Commerce Act of 2000 with Respect to Rule 17a-4(f), 66 FR 22916; Books and Records Requirements for Brokers and Dealers Under the Securities Exchange Act of 1934, Exchange Act Release No. 44992 (Oct. 26, 2001), 66 FR 55818 (Nov. 2, 2001) (The Commission has required that broker-dealers create and maintain certain records so that, among other things, the Commission, [SROs], and State Securities Regulators . . . may conduct effective examinations of broker-dealers.) (footnote omitted).

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with applicable securities laws, including antifraud provisions and financial responsibility standards.59

Under the proposed recordkeeping program for SBSDs and MSBSPs, broker-dealer

SBSDs and broker-dealer MSBSPs as broker-dealers would be subject to Rules 17a-3 and

17a-4.60 The Commission is proposing amendments to these rules to account for the security-

based swap and swap activities of broker-dealers, including broker-dealers registered as SBSDs

and MSBSPs, as well as to implement the specific recordkeeping requirements mandated under

the Dodd-Frank Act.61 Stand-alone SBSDs, stand-alone MSBSPs, bank SBSDs, and bank

MSBSPs would be subject to proposed Rules 18a-5 and 18a-6, which are modeled on Rules 17a-

3 and 17a-4, respectively, as these rules are proposed to be amended.

Proposed Rules 18a-5 and 18a-6 would not include a parallel requirement for every

requirement in Rules 17a-3 and 17a-4 because some of the requirements in Rules 17a-3 and 17a-

4 relate to activities that are not expected or permitted of SBSDs and MSBSPs. Further, the

proposed recordkeeping requirements that would be applicable to bank SBSDs and bank

MSBSPs are more limited in scope because, as discussed above in section I. of this release:

(1) the Commissions authority under section 15F(f)(1)(B)(i) of the Exchange Act is tied to

activities related to the conduct of business as an SBSD or MSBSP; (2) bank SBSDs and bank

MSBSPs are subject to recordkeeping requirements applicable to banks; and (3) the prudential

regulators rather than the Commission are responsible for capital, margin, and other

prudential requirements applicable to bank SBSDs and bank MSBSPs. For these reasons, the

proposed recordkeeping requirements that would be applicable to bank SBSDs and bank

59 See Commission Guidance to Broker-Dealers on the Use of Electronic Storage Media under the Electronic Signatures in Global and National Commerce Act of 2000 with Respect to Rule 17a-4(f), 66 FR at 22917.

60 See 17 CFR 240.17a-3; 17 CFR 240.17a-4. 61 As discussed in more detail below, the Commission also is proposing additional largely technical

amendments to Rules 17a-3 and 17a-4.

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MSBSPs are designed to be tailored more specifically to their security-based swap activities as

an SBSD or an MSBSP.62

2. Records to be Made and Kept Current

As discussed above, Rule 17a-3 requires a broker-dealer to make and keep current certain

records.63 The Commission is proposing to amend this rule to account for the security-based

swap and swap activities of broker-dealers, including broker-dealer SBSDs and broker-dealer

MSBSPs.64 The Commission also is proposing additional largely technical amendments to Rule

17a-3.65 With respect to stand-alone SBSDs, stand-alone MSBSPs, bank SBSDs, and bank

MSBSPs, the Commission is proposing new Rule 18a-5 which is modeled on Rule 17a-3, as

proposed to be amended to require these registrants to make and keep current certain records.66

For the reasons discussed above, proposed Rule 18a-5 does not include a parallel requirement for

every requirement in Rule 17a-3.67 In addition, paragraph (a) of proposed Rule 18a-5 contains

62 As discussed below in section II.B.2. of this release, the Commission is proposing that bank SBSDs and bank MSBSPs be subject to a limited reporting program of general information about their overall financial condition based on discrete elements of the reporting program the prudential regulators have established for banks.

63 See 17 CFR 240.17a-3. 64 Broker-dealer SBSDs and broker-dealer MSBSPs would be required to make and keep current all the

records required of broker-dealers under Rule 17a-3, as proposed to be amended, plus the additional records required specifically of an SBSD or MSBSP.

65 The proposed technical amendments are discussed below in section II.A.2.b. of this release. 66 See proposed Rule 18a-5. 67 The Commission is not proposing to include in proposed Rule 18a-5 requirements that would parallel

requirements in paragraphs (a)(4), (a)(13), (a)(14), (a)(15), and (a)(16) of Rule 17a-3. These paragraphs require broker-dealers to make and keep current records with respect to activities that stand-alone SBSDs and stand-alone MSBSPs would not be expected or permitted to engage in or would not relate to a banks business as an SBSD or MSBSP, or relate to rules that would not apply to stand-alone SBSDs, stand-alone MSBSPs, bank SBSDs, and bank MSBSPs. Further, the Commission is not proposing to include in proposed Rule 18a-5 requirements that would parallel requirements in paragraphs (a)(17), (a)(18), (a)(19), and (a)(20) of Rule 17a-3. These requirements are designed to enhance the ability of regulators, particularly State securities regulators, to conduct effective and efficient sales practice examinations. See Books and Records Requirements for Brokers and Dealers Under the Securities Exchange Act of 1934, 66 FR at 55818. By adopting these requirements, the Commission enabled States to adopt and enforce similar rules on the State level under the National Securities Market Improvement Act of 1996. See National Securities Markets Improvement Act of 1996, Pub. L. 104290, 110 Stat. 3416 (1996). As discussed

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one set of recordkeeping requirements applicable to stand-alone SBSDs and stand-alone

MSBSPs and paragraph (b) of proposed Rule 18a-5 contains a separate set of recordkeeping

requirements applicable to bank SBSDs and bank MSBSPs that are more limited in scope.68

As discussed above, section 15F(g) of the Exchange Act provides, among other things,

that each registered SBSD and MSBSP shall maintain: (1) daily trading records of the security-

based swaps of the registered SBSD and MSBSP; (2) daily trading records for each counterparty

in a manner and form that is identifiable with each security-based swap transaction; and (3) a

complete audit trail for conducting comprehensive and accurate trade reconstructions.69 Further,

section 15F(g)(2) provides that the daily trading records shall include such information as the

Commission shall require by rule or regulation.70 To implement section 15F(g) of the Exchange

Act, Rule 17a-3, as proposed to be amended, and proposed Rule 18a-5 include provisions that,

among other things, are designed to require information that would facilitate a comprehensive

and accurate trade reconstruction for each security-based swap transaction.

In this regard, the amendments to Rule 17a-3 and proposed Rule 18a-5 would require

broker-dealers, SBSDs, and MSBSPs to make and keep current daily trading records,71 ledger

accounts,72 a securities record,73 memoranda of brokerage orders,74 and/or memoranda of

below, the Commission has proposed external business conduct rules for SBSDs and MSBSPs and, as discussed below, the Commission is proposing recordkeeping requirements to support examinations for compliance with these proposed external business conduct rules.

68 Compare paragraph (a), with paragraph (b) of proposed new Rule 18a-5. 69 See 15 U.S.C. 78o-10(g)(1), (3), and (4). 70 See 15 U.S.C. 78o-10(g)(2). 71 See paragraph (a)(1) of Rule 17a-3, as proposed to be amended; paragraphs (a)(1) and (b)(1) of proposed

Rule 18a-5. 72 See paragraph (a)(3) of Rule 17a-3, as proposed to be amended; paragraphs (a)(3) and (b)(2) of proposed

Rule 18a-5. 73 See paragraph (a)(5)(ii) of Rule 17a-3, as proposed to be amended; paragraphs (a)(4)(ii) and (b)(3)(ii) of

proposed Rule 18a-5.

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proprietary trades75 with respect to security-based swap activity. The Commission has proposed

Rule 901 of Regulation SBSR, which would require market participants, including broker-

dealers, SBSDs, and MSBSPs, to report certain data elements to security-based swap data

repositories.76

The following data elements that would be required to be reported under proposed Rule

901 also would need to be documented in the daily trading records, ledger accounts, memoranda

of brokerage orders, and/or memoranda of proprietary trades of security-based swap transactions

required under the proposed amendments to Rule 17a-3 and proposed Rule 18a-5: (1) the type of

security-based swap;77 (2) the reference security, index, or obligor;78 (3) the date and time of

execution;79 (4) the effective date;80 (5) the termination or maturity date;81 (6) the notional

amount;82 (7) the unique transaction identifier;83 and (8) the unique counterparty identifier.84

74 See paragraph (a)(6)(ii) of Rule 17a-3, as proposed to be amended; paragraph (b)(4) of proposed Rule 18a-5.

75 See paragraph (a)(7)(ii) of Rule 17a-3, as proposed to be amended; paragraphs (a)(5) and (b)(5) of proposed Rule 18a-5.

76 See Regulation SBSR Reporting and Dissemination of Security-Based Swap Information, Securities Exchange Act Release No. 63346 (Nov. 19, 2010), 75 FR 75207 (Dec. 2, 2010). See also Cross-Border Security-Based Swap Activities; Re-Proposal of Regulation SBSR and Certain Rules and Forms Relating to the Registration of Security-Based Swap Dealers and Major Security-Based Swap Participants, 78 FR 30968 (re-proposing certain aspects of Regulation SBSR).

77 Regulation SBSR Reporting and Dissemination of Security-Based Swap Information, 75 FR at 75213 (discussing the requirement in paragraph (c)(1) of proposed Rule 901 to report the asset class of the security-based swap).

78 See id. at 75214 (discussing the requirement in paragraph (c)(2) of proposed Rule 901 to report the specific assets or issuers of any securities upon which the security-based swap is based).

79 See id. at 75213 (discussing the requirement in paragraph (c)(4) of proposed Rule 901 to report the time and date of execution of the security-based swap).

80 See id. at 75214 (discussing the requirement in paragraph (c)(5) of proposed Rule 901 to report the effective date of the security-based swap).

81 See id. at 75214 (discussing the requirement in paragraph (c)(6) to of proposed Rule 901 to report the scheduled termination date of the security-based swap).

82 See id. at 75214 (discussing the requirement in paragraph (c)(3) of proposed Rule 901 to report the notional amount of the security-based swap).

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The following data elements that would be required to be reported under proposed Rule 901

would also need to be documented in the securities record of security-based swap transactions

required under the proposed amendments to Rule 17a-3 and proposed Rule 18a-5: (1) the

reference security, index, or obligor;85 (2) the unique transaction identifier;86 (3) the unique

counterparty identifier;87 (4) whether the security-based swap is cleared or not cleared;88 and

(5) if cleared, identification of the clearing agency where the security-based swap is cleared.89 In

addition, the securities record for security-based swaps would parallel the securities record for

securities by requiring a record of whether the security-based swap is a long or short

position.90

Where a data element that would need to be documented in the daily trading records of

security-based swap transactions under the proposed amendments to Rule 17a-3 or proposed

Rule 18a-5 is substantively the same as a data element that would need to be reported under

proposed Rule 901, the Commission preliminarily believes that the type of information that

would need to be documented in the daily trading records could be the same data element

83 See id. at 75221 (discussing the requirement in paragraph (g) of proposed Rule 901 to report the unique transaction identifier for the security-based swap).

84 See id. at 7521775218, 7522175222 (discussing the requirement in paragraph (d) of proposed Rule 901 to report the unique identifier of the counterparty to the security-swap transaction).

85 See id. at 75214 (discussing the requirement in paragraph (c)(2) of proposed Rule 901 to report the specific assets or issuers of any securities upon which the security-based swap is based).

86 See id. at 75221 (discussing the requirement in paragraph (g) of proposed Rule 901 to report the unique transaction identifier for the security-based swap).

87 See id. at 7521775218, 7522175222 (discussing the requirement in paragraph (d)(1)(i) of proposed Rule 901 to report the participant ID of the counterparty to the security-swap transaction).

88 See id. at 75214 (discussing the requirement in paragraph (c)(9) of proposed Rule 901 to report the whether or not the security-based swap will be cleared by a clearing agency).

89 See id. at 75218 (discussing the requirement in paragraph (d)(1)(vi) of proposed Rule 901 to report the name of the clearing agency if the security-based swap will be cleared).

90 Compare 17 CFR 240.17a-3(a)(5), with paragraph (a)(5)(ii) of Rule 17a-3, as proposed to be amended, and paragraphs (a)(4)(ii) and (b)(3)(ii) of proposed Rule 18a-5.

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reported under proposed Rule 901.91

a. Amendments to Rule 17a-3 and Proposed Rule 18a-5

Undesignated Introductory Paragraph

Rule 17a-3, as proposed to be amended, would contain an undesignated introductory

paragraph explaining that the rule applies to a broker-dealer, including a broker-dealer dually

registered with the Commission as an SBSD or MSBSP.92 The note further explains that an

SBSD or MSBSP that is not dually registered as a broker-dealer (i.e., a stand-alone SBSD, stand-

alone MSBSP, bank SBSD, or bank MSBSP) is subject to the books and records requirements

under proposed Rule 18a-5.93

Similarly, proposed Rule 18a-5 would contain an undesignated introductory paragraph

explaining that the rule applies to an SBSD or an MSBSP that is not dually registered as a

broker-dealer.94 The note further explains that a broker-dealer that is dually registered as an

SBSD or MSBSP is subject to the books and records requirements under Rule 17a-3.95

Trade Blotters

Paragraph (a)(1) of Rule 17a-3 requires broker-dealers to make and keep current trade

blotters (or other records of original entry) containing an itemized daily record of all transactions

in securities, all receipts and deliveries of securities, all receipts and disbursements of cash, and

all other debits and credits.96 The Commission is proposing to amend paragraph (a)(1) of Rule

91 Proposed Rule 901 may be modified when adopted, which could include changing or eliminating certain data elements required to be reported under the rule. Any such modifications to the data elements could change the Commissions preliminary view on the comparability of the information to be recorded in the daily trading records and the information to be reported pursuant to proposed Rule 901.

92 See undesignated introductory paragraph of Rule 17a-3, as proposed to be amended. 93 Id. 94 See undesignated introductory paragraph of proposed Rule 18a-5. 95 Id. 96 See 17 CFR 240.17a-3(a)(1).

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17a-3 to require that the blotters specifically account for security-based swaps, and proposing to

include parallel blotter requirements in paragraphs (a)(1) and (b)(1) of proposed Rule 18a-5 that

are modeled on paragraph (a)(1) of Rule 17a-3, as proposed to be amended.97 In particular,

paragraph (a)(1) of Rule 17a-3, as proposed to be amended, would require broker-dealers,

including broker-dealer SBSDs and broker-dealer MSBSPs, to make and keep current blotters

containing an itemized daily record of all transactions in securities, including security-based

swaps, all receipts and deliveries of securities, all receipts and disbursements of cash, and all

other debits and credits.98 In order to document the attributes of security-based swaps, the

proposed amendments also would require that such records show the contract price of the

security-based swap, and include for each purchase and sale, the following information: (1) the

type of security-based swap; (2) the reference security, index, or obligor; (3) the date and time of

execution; (4) the effective date; (5) the termination or maturity date; (6) the notional amount;

(7) the unique transaction identifier; and (8) the unique counterparty identifier.99

Paragraph (a)(1) of proposed Rule 18a-5 mirrors paragraph (a)(1) of Rule 17a-3, as

proposed to be amended, and therefore, stand-alone SBSDs and stand-alone MSBSPs would be

required to make and keep current the same types of blotters as broker-dealers.100 Paragraph

(b)(1) of proposed Rule 18a-5 similarly would require bank SBSDs and bank MSBSPs to make

and keep current the same types of blotters but only with respect to their security-based swap

activities.101

97 See paragraph (a)(1) of Rule 17a-3, as proposed to be amended; paragraphs (a)(1) and (b)(1) of proposed Rule 18a-5.

98 See paragraph (a)(1) of Rule 17a-3, as proposed to be amended. 99 See id. 100 Compare paragraph (a)(1) of Rule 17a-3, as proposed to be amended, with paragraph (a)(1) of proposed

Rule 18a-5. 101 See paragraph (b)(1) of proposed Rule 18a-5.

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General Ledger

Paragraph (a)(2) of Rule 17a-3 requires broker-dealers to make and keep current ledgers

(or other records) reflecting all assets and liabilities, income and expense, and capital

accounts.102 These records reflect the overall financial condition of the broker-dealer and in the

Commissions view can incorporate security-based swap activities without the need for a

clarifying amendment. Because the overall financial condition of stand-alone SBSDs and stand-

alone MSBSPs is a matter of regulatory concern for the Commission, the Commission is

proposing to include a parallel provision in paragraph (a)(2) of proposed Rule 18a-5 that mirrors

paragraph (a)(2) of Rule 17a-3.103 Consequently, stand-alone SBSDs and stand-alone MSBSPs

would be required to make and keep current the same types of general ledgers.104

Ledgers for Customer and Non-Customer Accounts

Paragraph (a)(3) of Rule 17a-3 requires broker-dealers to make and keep current certain

ledger accounts (or other records) relating to securities and commodities transactions in customer

and non-customer cash and margin accounts.105 The Commission is proposing to amend

paragraph (a)(3) of Rule 17a-3 to require that the ledgers (or other records) specifically account

for security-based swaps, and to include parallel ledger requirements in paragraphs (a) and (b) of

proposed Rule 18a-5 that are modeled on paragraph (a)(3) of Rule 17a-3, as proposed to be

amended.106 In particular, paragraph (a)(3) of Rule 17a-3 would be amended to include a

requirement that broker-dealers, including broker-dealer SBSDs and broker-dealer MSBSPs,

102 See 17 CFR 240.17a-3(a)(2). 103 Compare 17 CFR 240.17a-3(a)(2), with paragraph (a)(2) of proposed Rule 18a-5. 104 See paragraph (a)(2) of proposed Rule 18a-5. 105 See 17 CFR 240.17a-3(a)(3). 106 See paragraph (a)(3) of Rule 17a-3, as proposed to be amended; paragraphs (a)(3) and (b)(2) of proposed

Rule 18a-5.

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make and keep current ledger accounts (or other records) itemizing separately as to each

security-based swap: (1) the type of security-based swap; (2) the reference security, index, or

obligor; (3) date and time of execution; (4) the effective date; (5) the termination or maturity

date; (6) the notional amount; (7) the unique transaction identifier; and (8) the unique

counterparty identifier.107

Paragraph (a)(3) of Rule 18a-5 is modeled on paragraph (a)(3) of Rule 17a-3, as proposed

to be amended, and therefore, stand-alone SBSDs and stand-alone MSBSPs would be required to

make and keep current the same types of ledgers (or other records).108 Unlike paragraph (a)(3)

of Rule 17a-3, paragraph (a)(3) of proposed Rule 18a-5 would not refer to cash and margin

accounts as these types of accounts involve activities that would not be permitted of stand-alone

SBSDs and stand-alone MSBSPs because they are not registered as broker-dealers.109 Paragraph

(b)(2) of proposed Rule 18a-5 similarly would require bank SBSDs and bank MSBSPs to make

and keep current ledger accounts (or other records) relating to securities and commodity

transactions but only with respect to their security-based swap customers and non-customers.110

107 See paragraph (a)(3) of Rule 17a-3, as proposed to be amended. 108 Compare paragraph (a)(3) of Rule 17a-3, as proposed to be amended, with paragraph (a)(3) of proposed

Rule 18a-5. 109 See id. 110 See paragraph (b)(2) of proposed Rule 18a-5. The Commission has proposed a definition of security-based

swap customer for the purposes of proposed Rule 18a-4. See Capital, Margin, and Segregation Requirements for Security-Based Swap Dealers and Major Security-Based Swap Participants and Capital Requirements for Broker-Dealers, 77 FR at 70278. Proposed Rule 18a-4 which is modeled on Rule 15c3-3 would establish segregation requirements for SBSDs with respect to their security-based swap customers. Id. at 7027470288. The term security-based swap customer would be defined in proposed Rule 18a-4 to mean any person from whom or on whose behalf the SBSD has received or acquired or holds funds or other property for the account of the person with respect to a cleared or non-cleared security-based swap transaction. Id. at 70278. The definition would exclude a person to the extent that person has a claim for funds or other property which by contract, agreement or understanding, or by operation of law, is part of the capital of the SBSD or is subordinated to all claims of security-based swap customers of the SBSD. Id.

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Stock Record

Paragraph (a)(5) of Rule 17a-3 requires broker-dealers to make and keep current a

securities record (also referred to as a stock record).111 This is a record of the broker-dealers

custody and movement of securities. The long side of the record accounts for the broker-

dealers responsibility as a custodian of securities and shows, for example, the securities the firm

has received from customers and securities owned by the broker-dealer. The short side of the

record shows where the securities are located such as at a securities depository.

The Commission is proposing to amend paragraph (a)(5) of Rule 17a-3 to require that the

securities record specifically account for security-based swaps, and to include parallel securities

record requirements in paragraphs (a) and (b) of proposed Rule 18a-5 that are modeled on

paragraph (a)(5) of Rule 17a-3, as proposed to be amended.112 Paragraph (a)(5) of Rule 17a-3,

as proposed to be amended, would contain separate provisions: one for securities other than

security-based swaps and one for security-based swaps.113 Specifically, paragraph (a)(5)(i)

would apply to securities other than security-based swaps and largely mirror the current text of

paragraph (a)(5) of Rule 17a-3.114 Paragraph (a)(5)(ii) would apply to security-based swaps.115

This paragraph would require a broker-dealer, including a broker-dealer SBSD and broker-dealer

MSBSP, to make and keep current a securities record or ledger reflecting separately for each

security-based swap: (1) the reference security, index, or obligor; (2) the unique transaction

identifier; (3) the unique counterparty identifier; (4) whether it is a long or short position in

111 See 17 CFR 240.17a-3(a)(5). 112 See paragraph (a)(5) of Rule 17a-3, as proposed to be amended; paragraphs (a)(4) and (b)(3) of proposed

Rule 18a-5. 113 See paragraphs (a)(5)(i)(ii) of Rule 17a-3, as proposed to be amended. 114 Compare 17 CFR 240.17a-3(a)(5), with paragraph (a)(5)(i) of Rule 17a-3, as proposed to be amended. 115 See paragraph (a)(5)(ii) of Rule 17a-3, as proposed to be amended.

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the security-based swap; (5) whether the security-based swap is cleared or not cleared; and (6) if

cleared, identification of the clearing agency where the security-based swap is cleared.116

Paragraph (a)(4) of proposed Rule 18a-5 mirrors paragraph (a)(5) of Rule 17a-3 as

proposed to be amended, and therefore, stand-alone SBSDs and stand-alone MSBSPs would be

required to make and keep current the same type of securities record.117 Paragraph (b)(3) of